Doug Noland, a financial expert at Asia Times gets exactly what is most irritating -- most irritatingly frustratingly wasteful -- about watching the banker bailout unfold, in the bolded text below:
Over the years, we've been pretty cognizant of the extreme nature of excesses; the extent of system vulnerability; and the expensive bill that would come due with the arrival of the bust. But I want to be especially clear on one thing: I am shocked and incredibly alarmed that all these measures became necessary at such an early stage of financial and economic adjustment. After all, the Dow remains above 11,000 and gross domestic product expanded 3.3% last quarter.
And this gets right to the heart of the matter - where the analytical rubber meets the road. A massive inflation of government obligations; a major government intrusion into all matters financial and economic; and an unprecedented circumvention of free market forces has been unleashed - but to what end?
I believe it is a grave predicament that such a rampage of radical policymaking has been unleashed in order to maintain inflated asset markets and to sustain a bubble economy. Normally, such desperate measures would be employed only after a crash and in the midst of a major economic downturn - not in efforts specifically to forestall the unwind. Not only will such measures not work, I believe they will only exacerbate today's already extreme global monetary disorder. They will definitely worsen the inevitable financial and economic dislocation.
It's frustrating first that the thrust of policy right now is to resist the implosion of the housing market bubble, when HOUSING REMAINS VASTLY OVERPRICED by historical standards. Even more frustrating to watch and wasteful is the effort to resist the implosion of the VASTLY OVERVALUED U.S. stock market bubble, which sits on a mountain of still now VASTLY OVERVALUED debt-based assets. It's just dumb to fight the inevitable drop of housing and stocks to something at least somewhat in line with historical levels. Aggressive 'market/price stabilization' measures should wait till the plummet reaches what should be a floor.
Importantly, Noland goes on directly to blast the monetarists' (who now call themselves the 'mainstream economists') revisionist misunderstanding of what caused and could've prevented the Great Depression. This historical fight exposes the root of the wrong understanding that is motivating our economic leaders' impending incredibly wasteful financial 'rescue' splurge:
I have over the past several years repeatedly taken issue with the revisionist view that had the Fed recapitalized the banking system after the '29 stock market crash the Great Depression would have been avoided. Some have suggested that $4 billion from the Fed back then would have replenished lost banking system capital and stemmed economic collapse. But I believe passionately that this is deeply flawed and dangerous analysis.
An injection of a relatively small $4 billion would have mattered little. What might have worked - albeit only temporarily - would have been the creation of many tens of billions of dollars of new credit required to arrest asset and debt market deflation and refuel the bubble economy. Importantly, however, at that point only continuous and massive credit injections would have kept the system from commencing its inevitable lurch into a downward financial and economic spiral.
It's interesting that George Soros shares many of Noland's views and has also written in resistance to the dangerous monetarist mythology about what caused and could've cured the Great Depression, but more on him down below. . . .
Exactly at a time like now we shouldn't be guided, as I believe we are in the form of characters like Henry Paulson and Robert Rubin, by the monetarist misunderstanding that a well-timed and one-time massive infusion of capital stops an unwinding economy in its tracks. Ain't true, says Noland (bold added):
Importantly, market, asset and economic bubbles are voracious credit gluttons. I would argue that the system today continues to operate at grossly inflated - bubble - levels. The upshot of years of credit excess are grossly distorted asset prices, household incomes, corporate cash flows and spending, government receipts and expenditures, system investment and economy-wide spending and, especially, imports. So to generally stabilize today's maladjusted system will, as we are now witnessing, require massive government intervention. Enormous government-supported credit growth will be necessary this year, next year, and the years after that. To be sure, a protracted and historic cycle of misdirected credit runs unabated.
Present efforts to sustain the bubble economy create an untenable situation. Washington is now in the process of spending trillions to bolster a failed financial structure, while focusing support on troubled mortgages, housing, and household spending. Regrettably, this is a classic case of throwing good money after bad. . . .
Noland adds, sounding like a 2008 Jerry Brown slash Jimmy Carter:
Our economy will have no choice but to adjust to less household spending, major changes in the pattern of spending (this is, less "upscale" and services), fewer imports, more exports, and less energy consumption.
Moreover, our economy must adjust and adapt to being much less dependent on finance and credit growth - which will require our "output" to be much more product-based as opposed to "services"-based. We'll be forced to trade goods for goods.
The current direction of bubble-sustaining policymaking goes the wrong direction in almost all aspects. At some point, the markets will recognize this bubble predicament, setting the stage for a very problematic crisis of confidence for the dollar and our federal debt markets.
I think Soros would agree with pretty much everything Noland says; he certainly sounds that way in He Foresaw the End of an Era, a book review of the latest Soros working out of his investment theory. In the review John Cassidy writes:
What distinguishes [the housing bubble burst] from earlier downturns, and what makes it so dangerous, is the historical and international economic situation in which it is taking place, Soros says. "Superimposed on the US housing bubble," he writes, "is a much larger boom-bust sequence which has finally reached its inflection, or crossover, point." The housing slump is following the normal historical pattern, he suggests,
but, in addition, it has also set in motion a flight from the dollar and unwinding of the other excesses introduced into the financial system by recent innovations. That is how the housing bubble and super-bubble are connected.
As described by Soros, the "super-bubble" developed over the past quarter-century and is the result of three underlying trends: globalization, credit expansion, and deregulation. By globalization, he means not just expansion of trade in goods and services, and the rise of China and India, but the US's emergence as the world's biggest debtor. . . .
As long as credit was flowing freely, the three elements of the "super-bubble" reinforced one another. Now that the housing bubble has burst and economic growth has slowed dramatically, reflexivity is working in the opposite direction: market fundamentals are influencing investor perceptions. . . .
Finishing his manuscript earlier this year, [Soros] predicted that the economic slump would be prolonged, partly because problems in the financial system would make countercyclical policies-such as easing the money supply to stimulate investment-less effective than usual. . . .
A fundamental tenet in Soros's investment theory is 'reflexivity', by which he measns that movements down and up in value create their own reality in a given direction and thus exaggerate the ups and downs beyond what 'rational' expectations theorists of the dominant (again the mainstream economist assholes') economic school believe should happen:
Viewed from Soros's perspective, the dramatic events of mid-September demonstrated how reflexivity was working on the downside, to devastating effect: the slumping real estate market had wreaked havoc on banks and other financial institutions, which had reacted by tightening lending standards, and cutting back on the amount of credit, particularly mortgage finance, that they were willing to extend to households and firms. Tighter credit conditions, in turn, were hurting the economy and putting further downward pressure on property prices, shattering hopes that the credit markets would stabilize of their own accord, and that troubled firms would be able to recapitalize their balance sheets.
Soros seems to understand economic bubbles and their recursive effects, but unfortunately the above thinking is not allowed inside the mainstream economics 'rational expectations' temple. So the mainstream economist idiots blithely march forward, expecting their trillion dollars are all that's needed, applied at this one key moment (Guided by "If only we'd injected $4 billion at that one key moment back in 1929, we wouldn't've had that other Great Depression!"), to get us 'back on track.' Damn are they in for some more very unpleasant surprises.
By the way, Soros agrees with Warren Buffet, Thomas Palley and others that Buy In makes much more sense that Bail Out. He also thinks Henry Paulson is a moron:
Mr Paulson's record does not inspire the confidence necessary to give him discretion over $700bn. His actions last week brought on the crisis that makes rescue necessary. On Monday he allowed Lehman Brothers to fail and refused to make government funds available to save AIG. By Tuesday he had to reverse himself and provide an $85bn loan to AIG on punitive terms. The demise of Lehman disrupted the commercial paper market. A large money market fund "broke the buck" and investment banks that relied on the commercial paper market had difficulty financing their operations. By Thursday a run on money market funds was in full swing and we came as close to a meltdown as at any time since the 1930s. Mr Paulson reversed again and proposed a systemic rescue.
Mr Paulson had got a blank cheque from Congress once before. That was to deal with Fannie Mae and Freddie Mac. His solution landed the housing market in the worst of all worlds: their managements knew that if the blank cheques were filled out they would lose their jobs, so they retrenched and made mortgages more expensive and less available. Within a few weeks the market forced Mr Paulson's hand and he had to take them over.
Mr Paulson's proposal to purchase distressed mortgage-related securities poses a classic problem of asymmetric information. The securities are hard to value but the sellers know more about them than the buyer: in any auction process the Treasury would end up with the dregs. . . .
The injection of government funds would be much less problematic if it were applied to the equity rather than the balance sheet. $700bn in preferred stock with warrants may be sufficient to make up the hole created by the bursting of the housing bubble. By contrast, the addition of $700bn on the demand side of an $11,000bn market may not be sufficient to arrest the decline of housing prices.
Something also needs to be done on the supply side. To prevent housing prices from overshooting on the downside, the number of foreclosures has to be kept to a minimum. The terms of mortgages need to be adjusted to the homeowners' ability to pay.
The rescue package leaves this task undone.
Yup. And, uh, Mr. Soros, your man Barack Obama was a main enabler of that 'undone' stuff.
